BOSTON, Feb 1 (Reuters) - After Wells Fargo & Co decided to ramp up risk in its flagship age-based retirement funds last year, one of its largest customers decided to call it quits, unhappy with the new investment strategy and how the bank handled the transition.

Wells Fargo notified investors in April 2017 that its target-date funds would become more aggressive, outlining a plan for better returns that included buying junk bonds, stocks in emerging markets and derivatives. It was a stark difference from the conservative investment strategy for which the funds were known.

TexaSaver, a supplemental retirement program for nearly 240,000 state employees and elected officials, was stunned by the changes, said Georgina Bouton, assistant director of benefit contracts at the Employees Retirement System of Texas. The retirement plan had fewer than 90 days to accept the revamped product or find another investment option.

The retirement plan asked Wells Fargo for more time to find another manager, but the request was denied, she said. TexaSaver ended a decade-long relationship with Wells Fargo, pulling more than $600 million from its target-date funds.

A Colorado-based retirement plan for more than 4,000 plumbers and pipe-fitters also pulled its money from the Wells Fargo funds, citing the unproven nature and significance of Wells Fargos changes, according to a notice sent to participants.

"It was a big surprise," Bouton said in an interview. "What Wells Fargo wanted to do contradicted why we picked them in the first place. I'm unhappy with the lack of professionalism at Wells Fargo and how this was conducted."

The bank says it needed to dial up risk to generate more income for investors, and recognizes that some customers are unhappy, said Fredrik Axsater, head of strategic business segments at Wells Fargo Asset Management.

"If the client is disappointed, then we are disappointed," said Axsater. "In our mind, the client is always right."

Axsater said Wells Fargo is committed to the more aggressive strategy. He described the overall reception in the marketplace as "really strong."

RESTORING TRUST

Wells Fargos troubles with some retirement plans were happening last year while the third-largest U.S. bank was trying to right itself from a scandal in its retail operation.

Employees at bank branches had created up to 3.5 million phony accounts in customers names without their permission, abuses detailed in a $190-million regulatory settlement in September 2016. Wells has since disclosed other potential issues with mortgages, auto loans and add-on products tacked onto accounts.

Chief Executive Officer Tim Sloan has pledged to restore trust by putting customers first. At the same time, he is trying to boost returns for shareholders by improving profits in businesses including asset management, where target date funds have been a particular sore spot.

In 2017 alone, Wells Fargos target-date funds experienced $4.7 billion in net withdrawals, according to Morningstar data. Overall assets there have dropped by two-thirds over the past three years, to $5.5 billion from nearly $17 billion, even as tens of billions of dollars have been flowing into target-date funds managed by other firms.

Reuters discovered complaints by TexaSaver and the Colorado Pipe Industry in public documents, but could not learn how many investors in total decided to leave its target-date funds after the investment strategy changed.

DIALING UP RISK

Until last year, Wells Fargo relied on a firm called Global Index Advisors (GIA) to manage asset allocation in target-date funds. GIA tracked performance of Dow Jones indexes, a passive strategy that was less risky than many peers'.

Previously, investors in those funds had 28 percent exposure to the stock market at retirement, compared with at least 50 percent exposure at the largest target-date providers Vanguard Group, Fidelity Investments and T. Rowe Price, U.S. regulatory filings show.

That conservative tilt was cause for celebration during the financial crisis. Wells Fargos 2010 target-date fund, for example, suffered a 10.75 percent loss in 2008, compared to an average decline of 22.5 percent in a category whose investors were on the eve of retirement.

During the stock market rally of the past nine years, that dynamic has changed, with Wells Fargos target date funds underperforming most competitors, according to Morningstar Inc data. The $888-million Wells Fargo Target 2020 Fund, for example, has generated average annual total return of 4.21 percent over the past 10 years, lagging 86 percent of rival funds.

As a result, the bank decided to replace GIA with an in-house management team and boost equity exposure to 40 percent at retirement, according to the notices it sent last year. It also added new exposures to junk bonds and derivatives including credit default swaps.

The bank also cut the funds' expense ratio to 0.19 percent from a range of 0.300.37 percent.

Because stocks are expected to rise much less in the near-term than they have in recent years, the portfolio needs more exposure to generate adequate income for retirees, Wells Fargo's Axsater said.

"Investor needs have changed and evolved," Axsater explained. "We live longer. Life expectancy has extended. Retirement patterns have changed."